Suppose that the monthly demand for AIDS treatment is Pn = 100 − Qn in North America and Ps = 60 − Qs in Sub-Saharan Africa due to lower income. The marginal and average variable cost of producing a month’s treatment is $20. The treatment’s manufacturer holds a patent and is a monopolist. For the calculations below assume zero fixed costs.
a. Derive the monopolist’s two-part pricing scheme that allows 1st-degree price discrimination. The scheme consists of a fixed fee and a per-unit price.
b. Calculate the implied profit, consumer surplus, and total welfare for each market.
c. Derive the monopolist’s block-pricing scheme that generates the same profit with the two-part pricing scheme you obtained in (a).
condition: 1. Set the quantity for each consumer type equal to the quantity implied by competitive pricing for that consumer type
2. Set the fixed fee for each consumer type equal to the total WTP implied by the quantity bought under competitive pricing
d. Calculate the implied profit, consumer surplus, and total welfare in each market.